On 10 August 2016, the government published responses to its consultation on simplifying tax and NICs on termination payments together with draft legislation.

In 2013 the Office of Tax Simplification recommended a review of the taxation of termination payments. They felt that the range and diversity of tax treatment (with some payments being fully taxable, some being tax-free without limit and some payments subject to the £30k exemption) was simply adding to the stress of businesses and their departing employees at an already stressful time. A consultation was launched in 2015.

On 10 August 2016, the government published responses to its consultation on simplifying tax and NICs on termination payments together with draft legislation.

The consultation confirms that, from April 2018, the government will:

  • remove the distinction between contractual and non-contractual PILONS (so that all PILONs will be treated as earnings subject to income tax, employer NICs and employee NICs);
  • retain the exemption from income tax and employers’ and employees NICs for payments relating to the termination, up to the current threshold of £30k;
  • align the rules for income tax and employers’ NICs so that employers’ NICs will be payable on payments above £30k;
  • abolish foreign service relief, except in relation to seafarers;
  • clarify that the exemption from tax for payments for injury excludes injury to feelings, except where this amounts to a psychiatric injury or a recognised medical condition;
  • largely retain the existing exemptions that apply for payments for disability, injury or death, payments under a tax-exempt pension scheme, payments for liabilities and indemnity insurance, payments to the armed forces, by foreign governments and for certain legal costs.

Comments on the draft legislation are invited by 5 October 2016 with further draft of the legislation expected to be published at the time of publication of the draft Finance Bill 2017.

The reforms proposed by the government take into account a number of the proposals made in the 2015 consultation (such as the retention of the existing threshold, alignment of income tax and NICs rules and abolition of the distinction between the treatment of contractual and non-contractual PILONs) but others (including the variable threshold for the exemption based on length of service, limiting the exemption to termination payments made on redundancy) have been dropped, apparently in view of the consultation responses that some of the proposals would in fact introduce new complexities into the rules.

The changes and clarifications should serve to simplify the taxation of termination payments and are welcomed by businesses and departing employees.

We will keep you updated with any further developments.

If you would like to discuss any issues raised in this article, we have specific taxation expertise advising in this area. For further advice, please contact Melanie List.

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